There’s an Unusual Thing Happening in the Housing Market

One red house among other white houses

US housing prices are finally falling.

October 3, 2022
Tracy Alloway - Bloomberg

It’s no secret that the US housing market has been softening as interest rates rise at the fastest pace in decades.

Higher mortgage rates mean the dramatic growth in home prices that we’ve seen over the past two years is beginning to slow. Sales of new homes recently came in at the weakest monthly level since 2018. Meanwhile, purchase applications are down 20% year-on-year, and so on.

But the rapid pace of rate hikes has also resulted in an interesting statistical anomaly. Months of supply — or the number of months it would take for the existing inventory of homes on the market to sell at the current sales pace — has jumped to 4.1 from a record low of just 2.1 back in January of this year. And, as Morgan Stanley strategist James Egan notes, rarely have we seen an increase of this size.

To some extent, the jump in inventory is to be expected. It’s maths. As sales volume falls while inventories rise, months of supply naturally increases.

But such a jump is intuitively striking, and the key question for housing-watchers is whether the absolute level of inventory — which is still low by many measures, even as homebuilders have ramped up construction since last year — will turn out to be more important than its rate of change. A housing market that is structurally undersupplied is going to be a lot less vulnerable to fewer sales.


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